The Problem with NGDP Targeting and Post on Canada Housing Bubble

The following is a draft for the American Thinker:

The Problem with NGDP Targeting

The monetary policy of targeting National Gross Domestic Product has started to become vogue in many economic and political circles.  Christina Romer, the architect behind President Obama’s first stimulus failure and professor of economics at the ideology vacuum known as the University of California, Berkley, recenlty penned a New York Times editorial outlining the issue:

Mr. Bernanke needs to steal a page from the Volcker playbook. To forcefully tackle the unemployment problem, he needs to set a new policy framework — in this case, to begin targeting the path of nominal gross domestic product.

Nominal G.D.P. is just a technical term for the dollar value of everything we produce. It is total output (real G.D.P.) times the current prices we pay. Adopting this target would mean that the Fed is making a commitment to keep nominal G.D.P. on a sensible path.

More specifically, normal output growth for our economy is about 2 1/2 percent a year, and the Fed believes that 2 percent inflation is appropriate. So a reasonable target for nominal G.D.P. growth is around 4 1/2 percent. 

Sounds simple enough right?  All Ben Bernanke and his technocrats at the Federal Reserve need to do is simply leave the switch on the dollar printer on its “high” setting and watch prosperity flow as dollars engulf the world.  Problem is, Bernanke is already printing at roughly a 15% annually for the past 6 months.  A recent report from Mail Online out of the U.K. showed that Brits can save 50% on their Christmas shopping by hopping across the pond to the U.S.

Romer, like many Neo-Keynesians, is convinced that if inflation could just be ginned up a little more, we could all feed on a free economic lunch.  Pesky things like asset bubbles (housing anyone?) don’t concern Romer despite the fact that newly created money always enters the economy through different sectors.

Another issue with “targeting NGDP” is what economist and Nobel laureate Fredriech Hayek called “The Pretense of Knowledge.”  Alan Greenspan famously dropped interest rates to historically low levels to fight the dot-cum bubble burst he created with his low interest rate policies in the late 90’s.  This easy credit financed a housing bubble in turn.  Greenspan was often labeled the “Maestro” because of his supposedly wondrous skills at finessing the economy through his central planning of interest rates.  We can all see how that worked out.

The idea behind targeting NGDP assumes that Bernanke, after failing to boost the economy for over three years, can somehow hit a target which the actions of billions determine.  Putting money in the hands of banks and individuals doesn’t guarantee that money is spent in a way to boost NGDP.  As financial blogger Mike “Mish” Shedlock puts it, “For starters the Fed cannot spend money, it can only lend it. Thus the Fed has at best an indirect affect on GDP.” The real danger lies in the overshooting of a target which can to lead to out of control inflation.  To think that just a few men are capable of coordinating the independent spending habits of billions is sheer idol worshipping at the tome of governmental central planning.

In the end, businessmen and entrepreneurs don’t keep their eyes on what potential National Gross Domestic Product could be.  The owner of my preferred local pizza hut isn’t scanning national economic statistics to see if NGDP has a possibility of hitting 5% a year from now.  He monitors of number of factors like input prices, output prices, tax rates, regulations, and profitability potential.  There are other, more accurate measures to calculate such factors outside a statistic so grossly simplified that its only use is parade fodder by politicians who think they save the world by spending other people's money.

Targeting NGDP is just an excuse for the only real tool the Federal Reserve has in its belt: inflation.  After an unprecedented increase in the monetary base in response to the financial crisis, it’s hard to believe that more money printing is the answer.  All it accomplished was the illusion of prosperity by the stock market and increased food and gas prices.

If further impoverishing the middle and lower class is the Keynesian agenda, consider it fulfilled.  NGDP targeting will just be more of the same as it sets the stage for another economic bust.

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Still needs a bit of work but it's getting there.

I also want to point out a post I just did over at LvMIC on the looming Canadian housing bubble.

Update- Ron Paul's best "debate" (not sure if forums count as debates) performance to date:

See what happens when the guy gets to talk in more than 30 second bursts?